To promote smart financial decision making for South Africans, in 2015 the government introduced the “Tax Free Savings account” (TFSA). This investment solution creates highly favourable conditions to store and grow capital in the long term and amplifies the compounding effect of reinvested income. It provides access to not only regular savings accounts, but investment into equities and other financial products, all in a tax efficient environment.
However, many South Africans are either unaware or underestimate the efficacy of this solution. TFSA’s have four key features investors should be aware of:
- Maximum Yearly Contribution of R36,000 (previously lower).
- Maximum Lifetime Contribution of R500,000.
- All deposits count towards your contribution limit, and making withdrawals does not increase capacity. (if you contributed R10 000 in January, and withdrew R15 000 in May, you will only be able to contribute another R26 000 for the year, you have effectively lost that R10 000 allocation).
- All Capital Gains, Interest and Dividends are exempt from taxes.
The tax exemption is really where the power of a TFSA lies. To illustrate this, assume that since 2015, you maximised your yearly contribution into your TFSA, and matched that investment in a non-tax-efficient structure. For both investments, selecting an approved fund within a TFSA like a Satrix ETF on JSE Top 40 (accessible in both environments).
The chart below shows the growth of the ETF and the capital gains of maximising your yearly contributions. The compounding effect of continuous contributions is clear.
An investor would have contributed a total of R369 000 so far. For both investments, the value grew to R693 460. However, when the investor wants to access this cash, the picture looks very different. The non-tax-efficient investment was subject to capital gains tax. Meaning R693 460 – R369 000 = R324 460 – R40 000 (annual exclusion) = R284 460 will be taxed at a maximum of 18%, resulting in a total of R204 811. This means you will get an extra 58% out in a TFSA environment.
This simple example reflects why a TFSA should be one of the first investments most South Africans should consider. It is suitable for those looking to:
- Fund their children’s education.
- Boost their retirement capital.
- Build long term wealth.
- Grow their capital in a tax-efficient environment.
A TFSA is NOT the correct vehicle for:
- An emergency fund.
- Growing capital that you may need access to in the short term.
How to Get Started
Opening a TFSA account has never been simpler. By opening an account here, our investment team can initiate the TFSA for you, select an appropriate investment fund, and schedule regular savings orders.
We always believe there is value in a quick conversation with an investment professional to ensure you are setup in the most convenient manner possible. Pick up the phone or drop us an email to get started today.
